WAEC SSCE - Commerce - 2011 (Essay)

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Explanation of the terms:

(a) Insurance underwriter: An insurance underwriter is the person or body that accepts (underwrites) a risk on behalf of an insurance company. The underwriter examines the proposal, assesses the degree of risk involved, decides whether to accept it, and fixes the premium to be charged. In effect the underwriter is the insurer who agrees to bear the risk and to pay compensation should the insured event occur.

(b) Promoters: Promoters are the persons who conceive the idea of forming a company and take all the necessary steps to bring it into existence. They prepare and file the formation documents, raise the initial capital, appoint the first directors and bankers, and generally carry out all preliminary work needed to float the company. Their work ends once the company is legally established and begins operations.

(c) Auctioneer: An auctioneer is a mercantile agent who sells goods by public auction on behalf of the owner to the highest bidder. He arranges and advertises the sale, conducts the bidding, and knocks down the goods to the person offering the highest price. He earns a commission on the sale proceeds and may sell in his own name without disclosing the owner.

(d) Factor: A factor is a mercantile agent who is entrusted with the possession of goods and sells them in his own name for a commission. He has authority to sell, receive payment and give a good title to the buyer, and he may make advances to his principal on the security of the goods. He may also have a lien on the goods for money owed to him.

(e) Broker: A broker is a mercantile agent employed to buy and sell goods for a commission (called brokerage) but who is not given possession of the goods. He merely brings the buyer and seller together to make a contract and does not sell in his own name. Examples include stockbrokers and insurance brokers.

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(a) Two advantages of courier services

1. Speed: Courier services deliver documents and parcels very quickly, often within hours or the same day, which is faster than the ordinary postal service.
2. Safety and reliability: Items are handled with care and tracked from pick-up to delivery, and there is proof of delivery, so the risk of loss or damage is greatly reduced.

(Other valid advantages: door-to-door collection and delivery; confidentiality of documents; insurance cover for valuable items.)

(b) Six communication services rendered by the post office

1. Ordinary letter/mail service: The post office collects, sorts and delivers letters and postcards within and outside the country at a fixed charge.
2. Registered mail: Valuable letters and documents are recorded and a receipt is given, and the sender is compensated if the item is lost, giving greater security.
3. Express (expedited) delivery: For an extra fee, urgent letters and parcels are given priority handling and delivered faster than ordinary mail.
4. Parcel post: The post office accepts, carries and delivers parcels of goods from one place to another at rates based on weight and distance.
5. Telegram/telex service: Short, urgent messages are transmitted quickly to distant places and delivered to the addressee (where the service operates).
6. Poste Restante: Letters are held at a named post office to be collected by travellers or persons who have no fixed address until they call for them.

(Other valid services: Private Mail Bag/P.O. Box rental, Business Reply Service, Cash on Delivery, Recorded Delivery, and philatelic sale of stamps.)

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(a) Industrial occupation

Industrial occupation refers to that group of occupations concerned with the actual production or extraction of goods and the conversion of raw materials into finished or semi-finished products. It covers all the activities that create physical goods, from obtaining raw materials from nature to processing them and assembling them into usable products. Industry is one of the two main branches of production (the other being commerce and direct/personal services).

Three examples of industrial occupation:

1. Extractive industry such as mining, farming, fishing and quarrying, which obtains raw materials directly from nature.
2. Manufacturing industry such as textile, cement and food-processing factories, which convert raw materials into finished goods.
3. Constructive (construction) industry such as building of houses, roads, bridges and dams, which assembles materials into permanent structures.

(b) Three uses of capital as a factor of production

1. It is used to purchase machinery, tools and equipment for production.
2. It is used to buy raw materials and to pay for stock of goods.
3. It is used to pay wages and salaries of workers and to meet other running expenses of the business.

(c) Four uses of land as a factor of production

1. It provides the site or space on which factories, offices, shops and other buildings are erected.
2. It supplies raw materials such as minerals, crops and timber extracted from or grown on it.
3. It is used for farming and rearing of livestock (agricultural production).
4. It provides natural water bodies (rivers, lakes and seas) used for fishing, irrigation and transportation.

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Desola Cobola as at 01/01/07

(a) Total fixed assets = Fixtures + Machinery + Motor vehicles

= 335,000 + 348,000 + 232,000 = Le915,000

(b) Total current assets = Stock + Debtors + Cash

= 120,000 + 111,000 + 82,000 = Le313,000

(c) Total current liabilities = Overdraft + Creditors

= 27,000 + 101,000 = Le128,000

(d) Working capital = Current assets - Current liabilities

= 313,000 - 128,000 = Le185,000

(e) Capital employed = Fixed assets + Working capital

= 915,000 + 185,000 = Le1,100,000

(Check: Total assets - Current liabilities = 1,228,000 - 128,000 = Le1,100,000.)

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(a) Four means of payment in business

1. Cash (legal-tender notes and coins).
2. Cheque.
3. Bank draft.
4. Credit transfer / standing order / electronic transfer.

(Other acceptable means: bill of exchange, postal order, money order, documentary credit.)

(b) Explanation of the terms

(i) Quotation: A quotation is a document sent by a seller to a prospective buyer, in reply to an enquiry, stating the price at which the seller is willing to supply the goods together with terms such as trade discount, delivery time and conditions of payment. It helps the buyer to compare prices from different suppliers before placing an order.

(ii) Hire purchase: Hire purchase is a system of buying goods in which the buyer takes possession of and uses the goods after paying an initial deposit, and then pays the balance by agreed instalments over a period. Ownership of the goods passes to the buyer only after the final instalment has been paid. If the buyer defaults, the seller may repossess the goods.

(iii) Deferred payment: Deferred payment is a credit arrangement in which the buyer receives the goods and full legal ownership immediately but is allowed to pay the price later, either in a lump sum or by instalments. Unlike hire purchase, ownership passes at once, so the goods cannot be repossessed for non-payment; the seller can only sue for the debt.

(iv) Quantity discount: A quantity (or bulk) discount is a reduction in the price per unit granted by a seller to a buyer who purchases goods in large quantities. It is given to encourage bulk buying, reward regular customers and reduce the seller's handling costs.

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(a) Five reasons for the protection of consumers

1. Ignorance of consumers: Many consumers lack full knowledge of the quality, content and true value of goods, and so need protection from being deceived.
2. Sale of harmful/adulterated goods: Some traders sell expired, fake, adulterated or unsafe products that can endanger the health and life of consumers.
3. Exploitation through high prices: Consumers need protection from sellers who charge excessive prices, hoard goods or create artificial scarcity.
4. Misleading advertisements and labelling: Consumers may be misled by false claims, wrong weights, measures and labels, and therefore need safeguards.
5. Imbalance of power: The seller (especially a monopolist) is usually more powerful and better informed than the individual consumer, who needs support to obtain fair treatment.

(Other valid reasons: to ensure the safety of consumers; to provide a means of redress for cheated buyers.)

(b) Five measures taken to protect consumers

1. Legislation: Government enacts laws (such as those on weights and measures, food and drugs, and standards) that punish dishonest traders and set minimum standards.
2. Establishment of standards bodies: Agencies such as the Standards Organisation and NAFDAC set and enforce quality standards and certify safe products.
3. Price control: Government fixes maximum prices for essential commodities to prevent overcharging and exploitation.
4. Formation of consumer associations: Consumer protection councils and associations educate buyers, receive complaints and press for their members' interests.
5. Provision of accurate information and labelling: Manufacturers are required to state the contents, weight, price, manufacture and expiry dates on products so that consumers can make informed choices.

(Other valid measures: inspection and testing of goods before sale, and courts/tribunals for redress.)

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(a) Four advantages of a public limited company

1. Large capital: It can raise very large amounts of capital by selling shares and debentures to the general public.
2. Limited liability: The liability of each shareholder is limited to the amount unpaid on the shares held, so private property is protected.
3. Continuity/perpetual succession: It has a separate legal existence and continues regardless of the death, insanity or withdrawal of any shareholder.
4. Transferability of shares: Shares are freely transferable through the stock exchange, allowing shareholders to recover their money easily.

(Other valid advantages: benefits from large-scale economies of scale; employs specialists and expert managers; can more easily obtain loans from banks because of its size.)

(b) Explanation of the terms

(i) Ordinary shares: These are the equity or risk-bearing shares of a company. Their holders are the true owners of the company; they carry voting rights but receive dividends only after preference shareholders have been paid, and the dividend varies with the level of profit made. In a bad year they may receive nothing, but in a good year they may earn a high dividend.

(ii) Cumulative preference shares: These are preference shares whose fixed dividend, if not paid in a year of low or no profit, accumulates as arrears and must be paid in full in later profitable years before any dividend is paid to ordinary shareholders. They enjoy a fixed rate of dividend and priority of payment but usually carry no voting rights.

(iii) Debenture: A debenture is a written acknowledgement of a loan made to a company, usually carrying a fixed rate of interest. A debenture holder is a creditor of the company (not an owner), receives interest whether or not profit is made, and ranks ahead of shareholders for repayment if the company is wound up. It may be secured (mortgage debenture) or unsecured (naked debenture).

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(a) Four differences between a loan and an overdraft

(A further difference: a loan may be granted to any customer, but an overdraft is available only to current-account holders.)

(b) Six factors considered by a bank manager before granting a loan

1. Character of the borrower: The manager considers the honesty, integrity and past repayment record of the customer to judge his willingness to repay.
2. Purpose of the loan: The loan should be for a genuine, productive and legal purpose that is capable of generating income to repay it.
3. Ability to repay: The income, cash flow and financial standing of the borrower are examined to be sure he can repay the loan with interest.
4. Security/collateral offered: The manager looks at the value and marketability of the security pledged, which the bank can sell if the borrower defaults.
5. Amount required and the borrower's own contribution: The size of the loan relative to the customer's own stake in the project is considered; a reasonable owner's contribution reduces the bank's risk.
6. Period/duration of the loan: The length of time for which the loan is needed and the repayment plan are assessed to match the bank's lending policy.

(Other valid factors: the customer's existing relationship with the bank, prevailing government/central bank credit policy, and the profitability or viability of the project.)

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(a) Six functions of advertising

1. To inform: It gives information to the public about the existence, features, uses and prices of goods and services.
2. To persuade: It influences and convinces potential buyers to prefer and purchase a particular product.
3. To remind: It keeps existing products in the memory of consumers so that they continue to buy them.
4. To create and increase demand: It stimulates new wants and expands the market for a product, thereby increasing sales.
5. To introduce new products: It launches new goods and services into the market and educates consumers on how to use them.
6. To build goodwill/brand image: It creates a favourable image and reputation for the firm and its brand, which helps to retain customers.

(Other valid functions: to counter the advertising of competitors; to support and motivate salesmen and middlemen.)

(b) Seven factors to be considered in choosing an advertising medium

1. Cost of the medium: The advertiser must choose a medium whose cost is within the advertising budget and gives good value for money.
2. Nature of the product: Technical or visual goods may need television or magazines, while simple consumer goods may be well served by radio or posters.
3. The target audience: The medium must reach the particular group of people (by age, income, sex or occupation) at whom the product is aimed.
4. Coverage/circulation of the medium: A medium that reaches a large number of the intended customers is preferred so that the message spreads widely.
5. Geographical area to be covered: For a local market, local media are chosen; for a national or international market, media with wider reach are used.
6. Level of literacy of the audience: For literate audiences, print media (newspapers, magazines) are suitable, while radio and television suit both literate and illiterate audiences.
7. Frequency and life-span of the message: Where repeated exposure is needed, media that allow frequent insertion or a lasting message (magazines, billboards) are preferred over short-lived ones.

(Other valid factors: the habits of the audience, availability of the medium, and the strategy of competitors.)

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(a) Five features of a partnership business

1. Number of partners: It is owned by between 2 and 20 persons (2 to 10 in the case of banking) who agree to carry on business together for profit.
2. Unlimited liability: The general partners have unlimited liability, so their private property can be used to settle the debts of the firm.
3. Partnership deed/agreement: The business is usually formed and governed by a partnership deed which states the rights, duties and profit-sharing ratio of the partners.
4. Sharing of profits and losses: Profits and losses are shared among the partners according to the agreed ratio or, where none exists, equally.
5. No separate legal entity: The firm has no legal personality distinct from its owners, so the partners are jointly and severally liable for its actions.

(Other acceptable features: it can be dissolved by death, insanity or bankruptcy of a partner; it is not required to publish its accounts; management is shared among the partners.)

(b) Five reasons why governments participate in business

1. To provide essential services: Government engages in business to supply essential goods and services such as water, electricity, and public transport which private investors may neglect because of low profit.
2. To generate revenue: Profits and dividends from government-owned enterprises provide additional income to the state for financing development projects.
3. To create employment: By setting up industries and corporations, government creates job opportunities and reduces unemployment in the country.
4. To provide capital-intensive projects: Some projects such as steel mills, refineries and railways require huge capital that private individuals cannot easily raise, so the government undertakes them.
5. To prevent exploitation and control monopoly: Government participates in order to check the exploitation of consumers by private monopolies and to keep the prices of essential goods within reach of the ordinary citizen.

(Other valid reasons: to protect strategic industries and ensure national security; to correct regional imbalance by siting industries in less developed areas; to control key sectors of the economy.)